Future of franchising may lie in retreat from formulaic uniformity

ANDREW TERRY AND CARY DI LERNIA
FEBRUARY 23, 2015
THE AUSTRALIAN
FRANCHISING — a clever method of business expansion through replication — may ­become a victim of its greatest strength: formulaic uniformity.
Businesses use mass replication to achieve efficiencies most non-franchisee businesses could only dream of. But there are markets and niches that traditional franchising strategies fail to tap effectively, precisely because of their penchant for blinding brand conspicuousness, system-driven product and service homogeneity.
New models allowing franchisee customisation and autonomy are emerging to challenge the ­prescriptive and standardised franchise model.
Two decades ago, William ­Davidow and Michael Malone in The Virtual Corporation identified forces that were ­transforming the marketplace and corporations. Contemporary commercial models needed to ­become adaptable, flexible and­ ­responsive.
Franchising provides a textbook example.
Since its development in the 1950s under the influence of franchising pioneers such as Ray Kroc (McDonald’s) and Harland ­Sanders (KFC), who were searching for practical solutions to the challenges they faced in the ­expansion of their licensed networks, franchising has revolutionised the distribution of goods and services in almost all sectors and has transformed the business landscape in most countries.
It has been franchising’s capacity for reinventing itself — its continual adaptation to accommodate changing circumstances and market conditions — that has guaranteed its increasing influence as a business model throughout the world.
Franchising is essentially a strategy for business cloning.
The franchising relationship is based on a prescribed model ­developed by the franchisor and carried out under the franchisor’s guidance and oversight by franchisees granted the right to trade under the franchisor’s brand and system.
It is the resulting formulaic uniformity — disapprovingly captured in the title of George Ritzer’s book The McDonaldisation of ­Society — that has been respons­ible for the spectacular development of franchising.
Nevertheless it is a retreat from such formulaic uniformity, it is suggested, that will be an increasingly significant factor in franchising’s development.
While independence and individualism have traditionally been seen as the enemies of franchising, the paradigm is shifting.
There are increasing commercial pressures to allow greater franchisee autonomy.
While franchising accommodates entrepreneurial franchisees prepared to work within the system, the opportunities for entrepreneurial franchisees who require an outlet for their individuality beyond the confines of the brand and system are, of course, limited.
For the typical franchisee, standardisation is a necessary, and virtually inevitable, reality. But it would be foolish to suggest this is an immutable truth.
Under the influence of Gen X and Gen Y, for whom the trait of ­individuality is apparently much stronger than for previous generations, customisation reflecting franchisee individuality may make inroads into the standard­isation that is now the backbone of franchising.
Recent research suggests allowing franchisees some freedom to customise outlets may foster entrepreneurial activity, enhancing individual performance and conferring competitive advantages to the system itself.
This can be achieved through a franchisor allowing franchisees operating under the system’s brand to customise or personalise peripheral, if not core, aspects of the system.
In a more radical iteration, which we call quasi-franchising, brand and related front-of-house architecture is not prescribed, or at least not in any detail.
The franchisee acquires the right, and the obligation, to use the franchisor’s back-of-house system, while retaining flexibility for entrepreneurial endeavour in building an idiosyncratic, eclectic and individualised business.
Branding is, and will inevitably remain, an integral and non-­negotiable characteristic of business format franchising.
However, there are market niches — bars, boutique hotels, cafes, restaurants are obvious examples — in which outlets may be more attractive to consumers because they are not associated with the standardised and formulaic uniformity and the generic replicability that are the hallmarks of business format franchising.
For most consumers, this is not because they are consciously part of an anti-brand movement but simply because they value the idiosyncratic nature of customised, rather than standardised, ambience. The proprietors of such establishments would still benefit from back-of-house systems and support in operational and ­managerial aspects of running their businesses.
While quasi-franchising may be thought of as a sophisticated form of outsourcing under which the quasi-franchisor provides a complete range of business ­services, this analogy is limiting.
A quasi-franchisor not only provides the complete package of back-of-house services but also an integrated back-of-house system that outsourcing does not.
The concept of B2B back-of-house services being provided in a systematised, structured and disciplined manner by a back-of-house service provider transcends traditional notions of outsourcing.
Commander Spock may have said to Captain Kirk in relation to this business model: “It’s franchising, captain, but not as we know it”. It is nevertheless likely to assume increased prominence.
For effective business operation — albeit at a more modest level than global domination — the back-of-house elements are essential, but the brand and associated front-of-house elements aspects are not inevitable.
This model provides a strategy that is attractive to consumers as well as aspiring entrepreneurs for whom business entry may ­otherwise be intimidating, if not practicably impossible.
Andrew Terry is professor of business regulation and Cary Di Lernia is associate lecturer in business law at the University of Sydney Business School.